Tornado Cash Ban Just Beginning: Regulators Target Cryptocurrency Mixers

Anger began to tear through the cryptocurrency community as soon as the US Treasury Tornado Cash sanctioned mixer. The Bitcoin brothers were furious. Enraged editors filled subreddits with laments about the sanctions. Members of Congress famous for support the industry sent open letters to Treasury Secretary Janet Yellen, urging her to explain the ban. The community equated the ban as an attack on free speech and innovation that went against the decentralized view of all technology.

The protests grew even more heated after Dutch financial crime authority FIOD arrested blockchain developer Alexey Pertsev on August 10, two days after the first US sanctions were imposed. He was arrested on suspicion of involvement with the blacklisted tumbler. More … than 50 protesters gathered in Amsterdam on August 20 to protest the arrest.

The Treasury, on the other hand, said it had simply taken action against a money laundering tool for cybercriminals. Whatever his motivations, the result of the sanctions is that US users have been cut off from Tornado Cash services.

The Treasury previously blacklisted the rival mixer in May. The regulator has hinted that more crypto crackdowns may be on the way.

“[The] The Treasury will continue to take aggressive action against mixers who launder virtual currency to criminals and those who assist them,” said Brian E. Nelson, Treasury Undersecretary for Terrorism and Financial Intelligence, when the ban was imposed.

For an industry already battered by the ongoing crypto crash, the sanctions against Tornado Cash are seen as yet another nail in the coffin of the cryptocurrency industry’s Wild West. But why are people so upset? Why do regulators think cryptocurrency mixers are so bad? To understand this, we first need to explain what cryptocurrency mixers are.

CryptoWhat are cryptocurrency mixers?

The US Treasury’s Office of Foreign Assets Control (OFAC) says cybercriminals have used Tornado Cash to launder north of $7 billion since the protocol launched in 2019. That figure includes $455 million stolen by a group of North Korean pirates. So let’s unpack that accusation in order to understand what these cups do.

Criminals launch cyberattacks every day. These attacks often mean that they install malicious code. Malware usually has a dual purpose: either it prevents victims from gaining access to their own systems, or it gives hackers access to private data, which cybercriminals can then threaten to spread online. In both cases, the hackers offer the victims the option to pay a ransom. If the ransom is paid, the victim regains access to their systems and the digital thugs promise not to spread the confidential data.

Almost without fail, the blackmailers demand that the ransom be paid in cryptocurrencies like bitcoin or ether. The reason is that the digital dosh gives them a layer of anonymity, which makes it harder for law enforcement to track the culprits. However, this does not mean that it is impossible to follow their path on the Internet.

“[Anyone,] including law enforcement, can easily track the money as all transactions are tracked in every wallet through the public key,” said Roger Grimes, data-driven defense evangelist at KnowBe4. Verdict. “So when someone, including a criminal, receives cryptocurrency, transfers it or withdraws it, the cops may not know exactly who it is, but they can [follow] the money.”

Such was the case in 2020 when the FBI managed to recover $2.3 million in bitcoins which was paid as a ransom to the cybercriminals behind the Colonial Pipeline hack. The cyberattack had crippled America’s largest fuel pipeline for five days. Colonial Pipeline had paid a ransom of $4.4 million.

Ransomware gangs obviously don’t want to be separated from their ill-gotten gains. This is where cryptocurrency mixers like Tornado Cash and enter, if the Treasury is to be believed. Cryptocurrency mixers allow users to mix their virtual currencies. Once shuffled, it’s much trickier to track the origins and subsequent journey of any deal put into a tumbler.

“The easiest way to imagine a mixer is to gather 100 people into a room and have everyone put a £10 note in a pile,” said Yoni Greene, intelligence manager at WRS ETL. Verdict. “The pile would then be shuffled, you would pull out a £10 note, and basically it would be clean. It is because the chain of money has broken.

So are cryptocurrency mixers just money laundering tools?

Even though cryptocurrency mixers can be used to launder money, crypto evangelists have argued that this view would be slightly limited.

“If cybercriminals are looking to launder money and cover their tracks, then a blender would be a good way to do that,” said Katharine Wooller, chief executive of cryptocurrency wealth platform Dacxi. Verdict. “However, one could also consider that the general public should also have a right to financial privacy.

“Ask this question – is there a difference between holding or hiding your money in a crypto mixer, or in a Swiss or Cayman Islands bank account – what checks are done and by whom?”

Tumblers could arguably give people living in oppressive regimes financial privacy and the ability to conduct legal transactions anonymously.

Cryptocurrency mixers could also provide a way for people living outside non-democratic countries to donate to causes within those borders. For example, many people rushed to donate money to help Ukraine fight against the Russian invasion. Many have done this using cryptocurrencies.

However, it could also mean that Russia could find out who donated to Ukraine using much the same leads used by the FBI to recover the ransom paid in the attack on the colonial pipeline. To prevent Vladimir Putin’s regime from tracking donations, many people used cryptocurrency mixers to hide their tracks.

One of those who did was Vitalik Buterin. The founder of Ethereum has said he used Tornado Cash to donate to Ukraine.

What will the Tornado Cash penalties mean for the crypto community?

The news of Treasury sanctions against Tornado Cash comes as regulators around the world are increasingly putting the screw on the crypto industry.

In the United States, the semi-new chairman of the Securities and Exchange Commission (SEC), Gary Gensler, has publicly urged Washington DC to give him more power to better oversee the industry.

In May of this year, the SEC doubled its workforce people responsible for monitoring the crypto market.

This summer, the market watchdog launched an investigation against Coinbase. He accused the exchange of allowing users to trade digital assets that should be considered securities. By defining certain cryptocurrencies as securities, it would allow the SEC to regulate the crypto market in new ways.

On the other side of the pond, the European Council reached an agreement in June to introduce new regulations aimed at controlling the trade in cryptocurrencies and similar digital assets. Crypto-asset proposition markets, or MiCAs, aim to protect investors and provide financial stability.

Countries like China, South Korea, India and Australia have or are considering stricter rules for digital assets.

The Financial Streetability Board, an international body that monitors and advises on the global financial system, urged lawmakers in July to introduce international regulations to oversee the crypto market.

“Regulators are certainly starting to catch up to the fact that crypto is starting to play a significant role in shaping global financial systems and capital flows, and it’s not going anywhere,” said Alan Vey, chairman and founder of the blockchain protocol. Adventus, tell Verdict.

While some parts of the crypto community resent any perceived challenge to the laissez-faire state of the industry, others have welcomed these moves. This second camp believes that stricter rules are necessary to clean up the reputation of digital assets and, ultimately, integrate them into the general public.

“However, given the pace at which blockchain evolves – with new developments on an hourly basis – regulators will need to continue working to adapt as the crypto market morphs and changes, which will require close interaction. with market participants to ensure that regulators’ fingers are on the pulse,” concludes Vey.

GlobalData is the parent company of Verdict and its sister publications.

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